Restraining Government in America and Around the World

Shocking News: People Are Less Likely to Work When Government Subsidizes Joblessness

Kudos to the Detroit News for a great story revealing that people are refusing to accept jobs because of government unemployment benefits. None of this should be surprising to people who understand that if you subsidize something, you get more of it. Alan Reynolds has been beating this drum for quite some time, but the message doesn’t seem to get through to politicians who think it is compassionate to lure workers into lives of dependency. But perhaps this excerpt from the Detroit News report will help (In a perverse way, I admire the one guy who admits that he doesn’t plan to find work until the government stops sending him checks):

In a state with the nation’s highest jobless rate, landscaping companies are finding some job applicants are rejecting work offers so they can continue collecting unemployment benefits. It is unclear whether this trend is affecting other seasonal industries. But the fact that some seasonal landscaping workers choose to stay home and collect a check from the state, rather than work outside for a full week and spend money for gas, taxes and other expenses, raises questions about whether extended unemployment benefits give the jobless an incentive to avoid work. …Chris Pompeo, vice president of operations for Landscape America in Warren, said he has had about a dozen offers declined. One applicant, who had eight weeks to go until his state unemployment benefits ran out, asked for a deferred start date. …Some job applicants are asking to be paid in cash so they can collect unemployment illegally, said Gayle Younglove, vice president at Outdoor Experts Inc. in Romulus. “Unfortunately, we feel the economy is promoting more and more people and companies to play the system and get paid or collect cash money so they don’t have to pay taxes,” Younglove said. …A full-time landscaping employee would make $225 more a week working than from an unemployment check of $255. But after federal and state taxes are deducted, a full-time landscaper would earn $350 a week, or $95 more than a jobless check. …The federal jobless benefits extension “is the most generous safety net we’ve ever offered nationally,” said David Littmann, senior economist of the Mackinac Center for Public Policy, a free-market-oriented research group in Midland. The extra protection reduces the incentive to find work, he said. It’s impossible to know exactly how many workers are illegally declining employment, but 15 percent of Michigan’s economy is underground, where people trade services, barter or exchange cash without reporting it to the government, Littmann said. One former landscaper, who has been on unemployment for a year, said he will search for work when the benefits expire, but he estimates he earns about $50 to $60 less a week than he would if he were working. “It’s crazy,” he said. “They keep doing all of these extensions.”

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Suppose you are 30 years old and you could choose between the lifestyle of two brothers in California:

A) Brother A makes $100K per year working in an office on seeking new cancer cures. After taxes he is left with about $80K and also spends about $8K per year on commuting costs to-from his work and another $12K on babysitting costs. So he is left with roughly 60K. What does he get for it? Stress racking his brain at the office, he hardly ever sees his children and the children are being raised by baby sitters.

B) Brother B decides to get himself fired, gets $25K from unemployment and works one month out of the year as a surfing instructor so that he can also claim the earned income credit and the “make work pay” credit. That brings his income up to about $30K. What does he get for it? No stress, is always around his children and the children are being raised at home – and in 3 years time he’ll also get healthcare paid by someone else.

Which brother would you rather be?

If you ask, Paul Krugman, he will tell you that either:

1) the number of people who would choose option B is so small that it will have no impact on prosperity and GDP.
2) He has in mind some other indirectly coercive way to discourage option (B)
3) He knows that a non negligible number of people would choose B but there is a lot of demand for his fairy tale economics propaganda of prosperity through decreased incentives to work and, besides, by the time the dodo hits the fan he’ll have retired.

My guess is that Krugman is too intelligent to imagine that he believes anything but something along the lines of (3).

Now if you want to make the example more dramatic, imagine that the spouse of brother A also works, so brother A is contemplating earning the second income, which will be taxed at the much higher marginal tax rate (that would be around 40-50% in a state like California). In that case, even without unemployment a large number of people would (and in practice already do) choose option B.

Americans better learn Greek. Because the vicious cycle of Greece is here.

[…] If you’re trying to educate a statist friend or colleague about the relationship between unemployment insurance and joblessness, this research should help. But you may also want to share this real-world story. And here’s another powerful anecdote. […]

I presume that few people believe that the unemployed should be left to starve. While I’d like to see a return to the idea of saving for a rainy day, and private charity to fill in when someone is unable or unwilling to provide for himself, realistically that would be very difficult to implement given present political and economic realities. So here’s my suggestion: Say that unemployment benefits are phased out when you get a job rather than abruptly stopped, e.g. you lost $1 of unemployment benefits for every $2 you earn. This would at least reduce the disincentive to get a job. Instead of the difference between a job and the dole being $50 a week or something trivial like that, it would at least be substantial.